Carnarvon Petroleum reaps benefits of new wells, production up 28%

Carnarvon Petroleum (ASX: CVN)
is reaping the benefits of new wells drilled on its Thailand oil
acreage with net production for the March 2014 Quarter increasing by 28%
to 59,383 barrels.

Along with a 2.2% increase in the average
sale price to $103.7 per barrel over the previous quarter, this sent its
revenue up 32% to $6.2 million.

Separately, partner Apache
Corporation (NYSE: APA) has reaffirmed plans to drill in late May or
June this year the highly anticipated Phoenix South-1 well, which
targets multi-trillion cubic feet of gas in Australia’s offshore North West Shelf.

“Production
in Thailand is performing very well and as announced on 13 March 2014,
flow rates are now deliberately being restrained to preserve the
longevity of the new wells,” managing director Adrian Cook said.

“This
is a new approach to managing these types of wells and we’re keen to
see if they perform as expected over the long term, and importantly,
slow the ingress of water, which has been a problem for this field in
the past.”

Carnarvon had $21.2 million in cash and cash equivalents as at 31 March 2014.

Thailand Oil Production

During
the March quarter, a total of six wells were drilled, completed and
commenced flow-testing in the main L44/43 concession (Carnarvon 40%).

This
includes the WBEXT-3C deviated development/appraisal well that flowed
at initial rates of up to 3,500 barrels of oil per day (bopd) and the
WBEXT-5A exploration well that successfully intersected several
sandstones east of the current WBEXT production area and has been put on
90-day test with rates of around 80 to 100bopd with no water.

Operator
Towngas (60%) is currently carrying out testing operations on the
WBEXT-3D well, which is a follow-up to WBEXT-3C well, in the same fault
block but interpreted to intersect the igneous V1 reservoir around 20
metres updip.

At quarter end, the production from the field was
being deliberately limited to around 3,000bopd in a bid to preserve the
longevity of new wells and slow the ingress of water.

Progress is
also being made on the water injection project with about 28,000
barrels of water injected into the reservoir during the quarter.

The
reservoir continues to pressure up while water production from the
fault block remains low, leading the joint venture to anticipate future
production increases as the project is optimised.

Notably, the
water injection process has arrested the previous natural field decline
and marginally improved production results from the first few months of
operation.

The operator is undertaking additional field work
intended to further lift production, in addition to that from continued
water injection.

Recent independent assessments have also
reported that Carnarvon’s oil reserves in Thailand are in line with last
year with Proved Reserves net to the company at 3.2 million barrels and
Proved and Probable Reserves at 11.8MMbbl.

Carnarvon had on 3
March announced the sale of half its 40% interest in Concessions SW1,
L44/43 and L33/43 to Singapore’s Loyz Energy (SGX: 594) for an initial
US$33 million on completion and up to US$32 million to be paid annually
at the rate of 12% of the buyer’s future revenue, to a limit of US$10
million per annum.

“Following completion of the sale, Carnarvon
expects to have cash of approximately A$50 million with no debt or
hedging, and minimal commitments,” Cook said.

“The additional
cash puts the company in a strong financial position for success in the
Phoenix South-1 well and alleviates market concerns about needing to
raise additional capital in the short term.”

North West Shelf

Operator
Apache Corporation and partner JX Nippon are funding the cost of
drilling the Phoenix South-1 well in WA-435-P and the contingent Roc-1
well in WA-437-P to a cap of US$70 million each.

Carnarvon has a 20% interest in both permits.

Phoenix
South, which targets multi-Tcf of gas in Australia’s prime offshore gas
province, is located on the border of WA-435-P and WA-437-P, which
together cover about 28,000 square kilometres of contiguous acreage that
are considered to be highly prospective for discovery of hydrocarbons.

The
permits include gas discoveries made in the early 1980’s by BP at
Phoenix-1 and Phoenix-2 that were considered uneconomic due to low gas
prices at the time they were made.

Since then, rising gas
prices both on the domestic and export liquefied natural gas markets
have increased, making these historic discoveries potentially economic.

Besides
their gas potential, both Phoenix South-1 and Roc-1 have the potential
to contain liquids-rich gas based on Phoenix well mud logs in comparison
with mudlogs from condensate-rich North West Shelf gas fields.

Given
the potential scale of the resource and its proximity to existing and
under construction infrastructure – including LNG, a success at Phoenix
South has multiple options for development.

In addition, a number of other oil and gas leads are present in the two permits.

Analysis

The rise in Thailand oil production clearly validates Carnarvon Petroleum’s
strategy to convert its existing sandstone field in the L44/43
concession into a high value igneous and sandstone asset have clearly
paid off.

It also clearly demonstrates the draw it had on
Singapore’s Loyz Energy, which is paying up to US$65 million for half of
Carnarvon’s 40% interests in its three onshore Thailand oil producing
assets.

Notably, the increased production will offset the impact
of selling half of the assets while allowing the company to reap the
benefit of having $50 million in bank (post-sale) along with future sale
royalty payments.

All eyes are now on the exciting Phoenix South-1 well that will be drilled late this month or in June.

This
is a potential game changer for Carnarvon given that is free carried by
Apache and JX Nippon for its 20% interest to a cap of US$70 million for
both Phoenix South-1 and the contingent Roc-1 well.

With an
influx of cash expected soon, Carnarvon’s current market cap. of circa
$95 million is leveraged to the highly anticipated exploration program.

Proactive Investors continues to maintain a share price target of between $0.14 and $0.16 within 6-9 months.